What is P/S ratio?
P/S koeffitsienti
In short
Market cap ÷ annual revenue. Used instead of P/E for companies that are not yet profitable.
Also known as: price to sales
The P/S (price to sales) ratio shows how much the market pays for each $1 of a company's annual sales. When a company is not yet profitable, P/E cannot be calculated — and P/S becomes one of the main valuation tools.
Formula
- P/S = Market cap ÷ Annual revenue
- or: Share price ÷ Revenue per share
Usually trailing twelve months (TTM) revenue is used.
How it is used
P/S is most useful when compared with similar companies in the same industry and with the company's own history. A company at P/S 2 looks cheaper than one at P/S 15, but that only holds if their margins and growth rates are similar.
Limitations
P/S ignores profit entirely. Comparing a retailer with huge sales but a 2% net margin to a software company with a 30% margin on P/S is misleading. P/S also ignores debt — metrics such as EV/EBITDA handle that.
Example
Two fictional companies, each with a $6B market cap:
- Company A: annual revenue $1.5B → P/S = $6 ÷ $1.5 = 4
- Company B: annual revenue $400M → P/S = $6,000M ÷ $400M = 15
If Company A has 200M shares, the price is $6B ÷ 200M = $30, revenue per share is $1.5B ÷ 200M = $7.50, and P/S = $30 ÷ $7.50 = 4 — the same result. The market may expect strong growth from B; if that expectation is not met, high-P/S stocks tend to fall the hardest.
Mistakes and tips
Judge P/S together with margins: high-margin businesses naturally carry a higher P/S.
Compare only within one industry — "normal" P/S differs completely between industries.
A very high P/S (say 20+) means the market has already priced in years of fast growth; even a small disappointment can cause a big drop.
Frequently asked questions
- What P/S ratio is considered cheap?
- There is no absolute threshold. Compare it with the industry average and the company's own historical range.
- Why is P/S used for unprofitable companies?
- With negative earnings P/E is meaningless, while revenue is almost always positive. So such companies are valued relative to sales.
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